Legal

How will CEO pay gap reporting affect you?

19 Mar 2019 By Katherine Maxwell

Katherine Maxwell explains what HR professionals need to know about the new executive pay gap requirements

When it comes to income inequality, the UK is one of the most unequal countries in Europe. Analysis by the CIPD and the High Pay Centre shows just how big the pay gap is: in 2017 a CEO was paid, on average, 145 times more than their employees, compared with 128 times more in 2016 and 146 times more in 2015.

The analysis also found that, between 2016 and 2017, full-time workers’ median earnings increased by 2 per cent, whereas the average FTSE 100 CEO saw an 11 per cent increase in pay. 

To address this issue (and no doubt emboldened by the success of gender pay gap reporting), new legislation that came into force in January this year means that companies with more than 250 employees are required to publish their executive pay gap with the first pay ratio reports expected in 2019. 

As well as highlighting pay imbalances, CEO pay gap reporting was also designed to address concerns that CEOs’ pay may not always reflect a company’s performance. The collapse of Carillon highlighted how problematic an issue this can be, with MPs hearing evidence that Carillon directors were more focused on their own pay packets than the business itself. Pay gap reporting hopes to “hold big business to account” and give employees a “greater voice in the boardroom”.

What should companies do?

Preparing these reports will not only be complex, but time-consuming too. The ratios will form part of the annual report on pay in companies’ remuneration reports. The lesson learned from gender pay gap reporting is that it’s never too early to start preparing. Employees’ pay must be calculated correctly (taking into account both pay and benefits) and companies must be sure they have all the required data to hand. The ratios of total CEO pay must be calculated against the 25th, median and the 75th percentile of UK employee’s pay. Companies must choose one of three methods – known as options A, B and C – to calculate employees’ pay. The option chosen is critical as it can have a significant effect on the resulting ratios.

But meeting the reporting deadline is only part of the equation. Companies should be able to offer employees and stakeholders a clear explanation for their ratios. And for high-profile businesses, this explanation may have to satisfy a broader public too. The sooner a company has calculated their ratios, the more time can be allocated towards presenting the results. Companies should consider the potential impact of the ratio disclosure on employees and should carefully plan the explanations and internal communication process. And these results could see companies having to outline policies explaining how they plan to reduce any pay imbalances identified. 

Advice 

The CIPD and the High Pay Centre advise organisations to publish clear information about pay distribution, that CEO rewards should be more aligned with an organisation’s pay practices, and that both financial and non-financial measures (such as investment in workforce training) are taken into account when assessing CEO pay. They also advise that HR has a role in ensuring senior leaders act on pay data insights, and that remuneration reports are shorter and clearer so they can be more easily be scrutinised. 

Taken as a whole, these recommendations seem to support the government’s wish for a slight shift in the balance of power, with employees (and HR) having greater input into boardroom decisions. 

Scrutiny 

Despite negative press surrounding the high pay packages of many CEOs, and continued pressure for pay to being more aligned to performance and the workforce as a whole, little has changed. It seems the introduction of CEO pay gap reporting is the government’s way of addressing this issue once and for all. Businesses that take note and implement steps to address any pay imbalances now will find themselves much better placed to brace the increased scrutiny on pay that will inevitably follow. It will remain to be seen if this will affect changes in behaviour. What is certain is that this is a significant additional disclosure burden on companies which should be carefully planned for and will no doubt continue to add to the debate on fairness in the UK.

Katherine Maxwell is a partner and head of employment at Moore Blatch

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